Caution over peace talks pauses the rally

Stocks pause after yesterday’s rally following constructive peace talks. Scepticism weighs on risk sentiment.

• Peace talks will remain in focus, but actions speak louder than words
• Crude oil briefly spiked below $100, tight supply concerns have lifted the price today
• German inflation & US ADP employment data are due

On Tuesday, global stocks tore higher, and oil tumbled as investors cheered signs of progress in Russia, Ukraine peace talks.
Despite the US warning that Russia’s pledge to pull back military activity from around the capital Kyiv and Chernihiv was more likely a play for time rather than a genuine push for peace, risk sentiment still soared. The DAX closed 2.8% higher, the EuroStoxx 50 up 3%, and the FTSE, a more modest 0.85%. The latter is being hurt by falling oil prices pulling heavyweight oil majors lower. BP shed 2.5%, and Shell 2% as oil fell $2 per barrel.
The upbeat mood continued into Wall Street, where the three leading indices booked gains between 1%-1.8%.
Today European bourses are pointing to a mildly weaker open as the bulls pause for breath and wait to see the words translated into actions. Attention will remain on peace talks as they continue in Turkey, but the markets will also want to see signs on the ground that Russia is adhering to its pledge. This would provide further optimism that the war could be in the final chapter, five weeks after it started.

Oil

Oil prices fell 8% across the start of the week, with WTI crude spiking below $100 to a low of $98 before rebounding. Crude oil currently trades around 104, considerably down from last week’s high of $116, but still comfortably above $100 as supply concerns remain. The elevated levels of volatility that are still being seen in the oil market highlight the extreme levels of sensitive sentiment among investors.

German inflation

Looking ahead, German inflation data will be in focus in the European session and could well be a cause for concern. Consumer prices are expected to rise to 6.7% YoY in March, up from 5.5% in February, as the Russia-Ukraine war exacerbates the surge in inflation. We have already seen the impact that the higher cost of living is having on consumer sentiment, which fell in Germany to its lowest level in a year. Even so the DAX managed to briefly push over key resistance at 14800, bringing 15000 into focus.
Later US ADP employment data will also be under the spotlight. Expectations are for 450k private-sector jobs added in March, down from 475k. Strong job creation would bode well for Friday’s non-farm payroll report.

FX

In the forex markets, the EUR has unsurprisingly outperformed its major peers. A relief rally on the back of the constructive talks has lifted the pair above 1.11. The ECB’s Lagarde is due to speak this morning and could shed more light on when the central bank is looking to raise interest rates.
The US dollar continues to fall on safe-haven outflows despite the Fed’s hawkish outlook. The USD dollar index trades down around 1% from yesterday’s high of 99.30.
USD/JPY continues to unwind the move to 125.10; a six-year high reached earlier in the week after the BoJ pledged unlimited bond-buying. The pair has since fallen 2.8%, shrugging off disappointing Japanese retail sales.